Earnings Call Transcript - FTEK Q2 2023

Operator, Operator

Greetings, and welcome to the Fuel Tech Second Quarter 2023 Financial Results Conference Call. It is now my pleasure to introduce your host, Conor Rodriguez, Investor Relations at The Equity Group. You may begin.

Conor Rodriguez, Investor Relations

Good morning, everyone. Thank you for joining us today for Fuel Tech's Second Quarter 2023 Financial Results Conference Call. Yesterday, after the close, we issued a copy of the release, which is available at the company's website, www.fueltech.com. Our speakers for today will be Vince Arnone, Chairman, President and Chief Executive Officer; and Ellen Albrecht, our Chief Financial Officer. After prepared remarks, we will open the call for questions from our analysts and investors. Before turning things over to Vince, I'd like to remind everyone that matters discussed in this call, except for historical information, are forward-looking statements as defined in Section 21E of the Securities and Exchange Act of 1934 as amended, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and reflect Fuel Tech's current expectations regarding future growth, results of operations, cash flows, performance and business prospects and opportunities as well as assumptions made by the information currently available to our company's management. Fuel Tech has tried to identify forward-looking statements by using words such as anticipate, believe, plan, expect, estimate, intend, will, and similar expressions, but these words are not the exclusive means of identifying the forward-looking statements. These statements are based on information currently available to Fuel Tech and are subject to various risks, uncertainties and other factors, including, but not limited to, those discussed in Fuel Tech's annual report on Form 10-K and Item 1A under the caption of Risk Factors and subsequent filings under the Securities Exchange Act of 1934 as amended, which could cause Fuel Tech's actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements. Fuel Tech undertakes no obligation to update such factors or to publicly announce the results of any forward-looking statements contained herein to reflect future events, developments or changed circumstances for any other reason. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those in the company's filings with the SEC. With that said, I'd like to turn the call over to Vince Arnone. Vince, please go ahead.

Vincent Arnone, Chairman, President and CEO

Thank you, Conor. Good morning, and I appreciate everyone joining us on the call today. Our second quarter results were mixed across our business segments. The APC segment saw a 25% revenue increase compared to the same quarter last year, while the FUEL CHEM segment experienced a revenue decline due to unplanned maintenance downtime at units using our technology. We are maintaining a conservative cost structure, investing in growth, especially in our water and wastewater treatment technology, and optimizing our balance sheet. We finished the quarter with nearly $33 million in cash and investments and no long-term debt. As mentioned last quarter, we launched our first on-site demonstration as part of our Dissolved Gas Infusion technology initiative, known as DGI, which is using a small-scale dissolved oxygen infusion system in aquaculture in the Western United States. This deployment, which will wrap up later in the third quarter, has shown promising results, aligning with our goal to enhance our customers' operational productivity and efficiency with optimized levels of dissolved oxygen. The DGI system consistently maintains dissolved oxygen levels above 150% of saturation across varying site conditions. While it is too early to determine the overall impact of the increased dissolved oxygen levels on the growth rates of the farmed animals, initial data suggests an improvement in this area. We have met all customer test objectives so far and our internal expectations as well. We anticipate successfully concluding this trial in Q3 and are discussing a long-term solution with this customer, depending on the pilot's outcome. Beyond this demonstration, we are actively seeking additional opportunities across various markets, finalizing marketing materials for all targeted sectors, and identifying channel and supply chain partners. Additionally, we are designing a commercial scale small-scale DGI system. Now, let's take a moment to discuss our APC and FUEL CHEM business segments. The FUEL CHEM segment saw a decrease in revenue and profit in the second quarter due to unplanned unit outages for maintenance at several customer sites. Entering the third quarter, our larger-scale customer units are operating at historically normalized levels due to weather-related dispatch, and we expect improved performance for FUEL CHEM in the latter half of 2023. Regarding international opportunities in the FUEL CHEM segment, we are pursuing the expansion of our chemical technology in Mexico through our partner there to mitigate emissions from burning high sulfur fuel oil, which is being done without adequate environmental measures and is affecting the health of local communities. We recently extended our current program at one facility for two years and believe that political pressure is growing in support of implementing our FUEL CHEM program at other facilities in the country. Our partner is in talks with the state-owned utility CFE about applying our technology at several units. Looking at the entirety of 2023, we still expect FUEL CHEM revenues to modestly decline from 2022 levels, mainly due to reduced program usage at our key accounts from the high levels seen in 2022, client maintenance-driven outages in the second quarter, which I mentioned earlier, and the loss of one account due to plant closure. Now, turning to the APC segment. Revenue increased to $3.4 million from $2.7 million in the same quarter last year, primarily driven by the timing of project awards and the initiation of work on contracts awarded in 2022 and continuing into the first half of 2023. These projects include our SCR, SNCR, and ULTRA emissions control solutions at natural gas and coal-fired units in the U.S., Europe, and the Pacific Rim. Last week, we announced $2.2 million in new project awards. These projects span various end markets with completion dates ranging from Q3 of this year to Q1 of 2024. We also anticipate additional contract awards of $3 million to $5 million before the end of Q3. Last quarter, we addressed the EPA's new rule requiring 23 states to reduce nitrogen oxides emissions from power plants and certain industrial facilities. The EPA states that this measure aims to tighten NOx emission standards by updating the Cross-State Air Pollution Control Rule in accordance with the Clean Air Act. We believe this federal rule will act as a catalyst for new APC orders over the coming years as utility and industrial customers seek additional methods to reduce NOx emissions. Based on our performance in the first half of this year, the effective backlog we have today, and the business development efforts underway, we remain confident that our APC revenues for 2023 will exceed the 2022 APC revenues of $10.6 million. Primarily driven by the APC business, we also expect total revenues for 2023 to modestly increase to between $28 million and $30 million, up from $26.9 million in 2022. This outlook does not account for any significant contributions from DGI as we are still in the early commercialization stages, nor does it incorporate any notable contributions to APC from the recent EPA ruling. In closing, I would like to thank the Fuel Tech team once again for their hard work and dedication, as well as our shareholders for their continued support as we evolve our operations and enhance our presence as a global provider of technologies that enable clean air and pure water. Now, I will turn the call over to Ellen. Ellen, please proceed.

Ellen Albrecht, CFO

Thank you, Vince, and good morning, everyone. For the quarter, consolidated revenues were $5.5 million compared to $6.4 million in last year's second quarter, reflecting higher APC segment revenues, offset by a decline in FUEL CHEM product revenue. APC segment revenue increased 25% to $3.4 million from $2.7 million in the prior year period. This increase was primarily driven by timing of project execution and new APC orders announced during 2022 and continuing through the first 6 months of 2023. FUEL CHEM product revenue was $2 million compared to $3.6 million in the prior year quarter, primarily the result of unplanned client maintenance and outages throughout the quarter. As Vince mentioned, we believe these outages have subsided and that FUEL CHEM's performance has returned to historical operating levels and will improve in the second half of the year. Consolidated gross margin for the second quarter was 37% of revenues as compared to 42% of revenues in the prior year period. This decline can be attributed to changes in segment mix with a slight decline in APC gross margin due to project and technology mix and lower FUEL CHEM margin due to the lower revenue for the FUEL CHEM segment. Consolidated APC segment backlog as of June 30 was $6.6 million, down sequentially from $7.6 million at March 31, 2023, and $8.2 million at December 31, 2022. Backlog at quarter end consisted of $3.4 million of domestic-delivered project backlog and $3.1 million of foreign-delivered project backlog. SG&A expenses for the quarter were flat year-over-year at $2.9 million. For the full year 2023, we expect SG&A expenses to range between $13 million and $13.5 million as we invest in resources to support current business initiatives and in the development of our DGI technology operations. Research and development expenses for the second quarter increased to $413,000 from $289,000 in last year's second quarter. The increase was driven by new product development efforts in water treatment technologies and more specifically, commercializing our Dissolved Gas Infusion technology. Our operating loss was $1.3 million compared to $485,000 for the prior year period, primarily driven by lower FUEL CHEM revenues, the effect of which were mitigated by a relatively stable year-on-year expense profile. As we discussed last quarter, we continue to take advantage of the favorable interest rate environment. And as of June 30, 2023, we have invested approximately $30 million in held-to-maturity debt securities and money market funds. This generated $307,000 of interest income in the second quarter and $646,000 for the 6-month period ended June 30 compared to $9,000 for the same period in 2022. We continue to expect that interest income for 2023, barring any unusual deployments to grow the business, will exceed $1.2 million. Our net loss for the quarter was $1 million or $0.03 per share compared to a net loss of $356,000 or $0.01 per share in the same period one year ago. Adjusted EBITDA loss was $1.2 million compared to an adjusted EBITDA loss of $200,000 in the prior year period. Our financial position remains quite strong. As of June 30, we had cash and cash equivalents of $15.1 million and short and long-term investments totaling an additional $17.7 million. Working capital was $31.2 million or $1.04 per share. Stockholders' equity was $44.6 million or $1.44 per share, and the company continues to have no outstanding debt. I share Vince's optimism about our future and upcoming improved performance and our ability to support Fuel Tech's expected growth. I appreciate your time. And now I'll turn the call back over to Vince.

Vincent Arnone, Chairman, President and CEO

Thanks very much, Ellen. Operator, I'd now like to open the call for questions, please.

Operator, Operator

Our first question is from Sameer Joshi with H.C. Wainwright.

Sameer Joshi, Analyst

On the FUEL CHEM front, are you getting the full benefit of the quarter that is with all the unplanned maintenance activities at your client sites complete before commencement of the 3Q?

Vincent Arnone, Chairman, President and CEO

Can you ask that question one more time, Sameer? I lost a little bit of it, please.

Sameer Joshi, Analyst

Yes. On the FUEL CHEM front, for the third quarter, are you experiencing any unplanned maintenance that might affect revenues, or was everything completed in the second quarter, allowing for full revenues in the third quarter?

Vincent Arnone, Chairman, President and CEO

Yes. It was largely completed in Q2, Sameer. Yes, as we've moved into Q3, those outages have been eliminated. We are seeing a more normalized run rate for our primary accounts here in Q3 thus far. So we are not expecting any material changes in that activity right now.

Sameer Joshi, Analyst

Right, right. And this takes into account one of the plant closures previously discussed?

Vincent Arnone, Chairman, President and CEO

That is correct. That is correct.

Sameer Joshi, Analyst

Okay. Okay. Got it. On the SG&A front, they came in a little bit lower than we had expected. And I know you have guided for a range. But are there any specific actions that you took to bring the SG&A down? Or was there some one-time in this Q?

Vincent Arnone, Chairman, President and CEO

No, I wouldn't say that there's anything unusual occurring right now with SG&A, Sameer. I mean we're watching our development on the DGI front. As I have mentioned on prior conference calls, we have not invested significantly in human resources or other SG&A-related expenses as it relates to DGI. So we're watching the timing of that closely. As we do see signs that this is going to fully turn into a commercially viable activity, we will see increases in SG&A related to that further investment. Other than bringing in our lead of DGI earlier this year, Bill Decker, we have not made material changes in human resources for DGI. But as soon as we see signs of success, and particularly with the demonstration that's ongoing right now, as we move throughout this year into '24, we will be talking about expanded investment in SG&A as it relates to water and wastewater treatment. That just has not happened yet.

Sameer Joshi, Analyst

Understood. That is on the SG&A front on DGI?

Vincent Arnone, Chairman, President and CEO

Correct. Yes.

Sameer Joshi, Analyst

But on the R&D front, I know 2Q expenses were slightly higher because of this demonstration, and I think you are working on other opportunities. Should we expect R&D expense to be couple hundred thousand dollars more or in line with 2Q rather than 1Q?

Vincent Arnone, Chairman, President and CEO

I would say that the Q2 number that you're seeing right now, you would expect to see in Q3 and perhaps Q4. Yes, we are investing in the demonstration. That is going to continue into Q3. And we would expect as we move throughout the year to have the opportunity to engage in additional demonstrations as well. So yes, I confirm that we would expect to see that uptick a little bit through the remainder of this year.

Sameer Joshi, Analyst

Okay. Regarding DGI, have we talked about whether these systems will be customized during installation or if there's a standard modular design that allows for the addition of multiple units? Can you provide some insight into how that works?

Vincent Arnone, Chairman, President and CEO

Right. I mean the way we've originally looked at the design for the DGI systems is to be able to have the modular in nature, to be able to meet different application requirements. So that is our approach. The demonstration that we're doing right now is a small scale DGI system demonstration. It delivers about 15 pounds of oxygen per day. As I've mentioned in prior conference calls, we actually have designed and built a DGI delivery system that can deliver up to 2,000 pounds of oxygen per day. So we're looking at developing a, call it, a modular range of systems that can be used for a variety of different end market applications. That's our intent.

Sameer Joshi, Analyst

Understood. And just maybe one last question. Are we expecting any revenue from DGI? I know your outlook does not include any, but is there a chance that one of these demonstrations could turn into an order that would be recognized in the fourth quarter of 2023?

Vincent Arnone, Chairman, President and CEO

I would say, yes, that is a possibility. I would not expect it to be material, Sameer, but yes, it is a definite possibility.

Operator, Operator

I'm not seeing any additional questions at this time. So I'd like to pass the floor back over to Vince Arnone for any additional closing remarks.

Vincent Arnone, Chairman, President and CEO

Thank you, operator. Once again, I'd like to thank all of our stakeholders, our employee team, our Board of Directors and, of course, our shareholders for their continued support. We are working diligently to bring our water and wastewater treatment initiative to commercialization. At the same time, we're continuing our focus on efforts on expanding our base business segments to the extent we can on a global basis. Thanks again for your time, and thanks for your interest in Fuel Tech. Everyone, have a great day. Thank you.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference and webcast. Once again, we thank you for your participation, and you may disconnect your lines at this time.